Question:  I am considering unique ways to attract qualified employees to my company.  Can I offer to help employees pay down their student loan debt?

Answer: Yes, but both you and the employees who benefit from a loan repayment program should understand the potential issues and risks of these benefits.

With the national unemployment rate at 3.6 percent as of May 2019, some businesses are boosting their appeal by offering to help employees pay down their student loans. These benefit programs help attract workers in a competitive labor market and increase employee retention as individuals with student loans may stay with a company longer to reap the full benefits of these plans.

Companies are not limited to a single approach when it comes to offering a student loan repayment benefit. For example, the online learning company Chegg recently made headlines by offering entry-level and manager-level employees up to $5,000 per year toward their student debt.  Chegg sets aside a pool of its shares, from which it gives an employee a stock grant with taxes withheld as income.  Chegg sells the stock for the employee and the after-tax cash goes to a third-party company that works with employers to manage debt payments to the schools employees attended.   Similarly, Fidelity Investments has an employee debt forgiveness plan that offers up to $10,000 over five years to pay off school loans.  Fidelity’s plan also provides employees with online tools to help them better manage their student loan debt.  While these programs may help attract new talent, employers and employees alike should understand the financial implications of such programs.

Unlike employer-sponsored retirement plans and health insurance, there is currently no tax benefit for employers that provide money directly to employees or pay down employees’ student loans. Such payments are considered regular wages so both employers and employees pay taxes on the loan payments. There are ongoing efforts at both the federal and state level to provide tax incentives to promote these increasingly-popular employer-sponsored debt repayment programs.

In February 2019, federal lawmakers introduced the Employer Participation Repayment Act, which would permit employers to contribute up to $5,250 tax-free annually to their employees’ student loan debt repayment. The bill seeks to expand the current Employer Education Assistance Program, which only provides assistance for workers who are seeking additional education, but does not benefit individuals who already have incurred student loan debt.

California lawmakers introduced similar legislation earlier this year. Assembly Bill (AB) 152 seeks to encourage the use of employer-sponsored student loan debt programs in California by amending California’s Revenue and Taxation Code to allow employees to deduct employer contributions toward student loans from their taxable income.  If passed, AB 152 would allow an employee to exclude from gross income amounts paid by an employer on the employee’s behalf, not to exceed $5,250 per calendar year, toward the principal or interest on a qualified education loan.

While these recent legislative developments are encouraging, the California legislation has failed to gain traction thus far, and, given the current atmosphere in Washington, it is hard to predict if or when any particular legislation will be passed. For now, employers should be aware of the financial implications of this benefit, and work closely with employees to make sure that employees also understand their financial responsibilities.